Municipal cost behavior during financial crisis and financial sustainability periods: Evidence from Spain

Abstract

This study explores municipal cost behavior during periods of financial crisis and strict financial sustainability legislation. The study employees Anderson, Banker, and Janakiraman approach on a data sample of 48,096 observations from Spanish municipalities for the period 2008-2018. The results suggest that during this period municipality total, service provision and investment expenses exhibit anti-sticky behavior; that is the cost response to an activity level decrease is greater than its response in the case of an activity increase. After the adoption of the financial sustainability legislation this behavior is more intense for all expense categories. Moreover, in periods preceding elections the anti-stickiness trend is mitigated, while size appears to play a role as well, with larger municipalities showing greater anti-stickiness. Eventually, it appears that resource adjustment motivations during crisis periods, under law enforcement and before elections, play a key role in municipal asymmetric cost behavior.

Acknowledgments

The authors would like to thank Diego Prior and Sandra Cohen for their valuable suggestions on an earlier draft.

Notes

1 While cost refers to the sacrifice of a resource to achieve a particular purpose, the response of costs to sales/revenues changes is known as cost behavior and applies to both the private and public sector. This behavior may vary with the activity changes or may be unaffected by these changes.

2 i Chapter 6 of the economic classification of expenses which corresponds to Capital Expenses.

3 ii Law 27/2013 on Rationalization and Sustainability of the Local Administration substantially modified articles of Law 7/1985 regulating the local system in order to clarify municipal powers and organizational structure in accordance with the principles of efficiency, budget stability and financial sustainability.

4 The starting point for the development of the Law was the preceding European Union directives, which became known as the “Six Pack”, the “Two Pack” and the “Fiscal Compact”. This set of EU directives targeted at reinforcing EU member states’ public sector budget stability and surveillance.

5 Chapters 1 to 5 of municipal budget revenues include direct taxes; indirect taxes; fees-public prices-other income; current transfers; and equity income, respectively.

6 This is also evident in the concept of budget incrementalism which has been criticized for resulting to short-termism and maintenance of existing policies, with politicians only discussing the increase of budget items from the previous existing base without any room for critical consideration (Rubin, 2019).

7 The extented model (eq. 2) uses 48,096 observations, while the simple linear model (eq. 3) uses 72,253 observations.

8 Given the limited availability of public data at the municipal level, we use information coming from the annual municipal budgets, not from the municipal Balance Sheet and Income Statement.

9 To test further the implications of debt, two subsamples (municipalities with greater debts over revenues and municipalities with lower debts over revenues) were formed. Nevertheless, no significant differences were revealed regarding cost stickiness between these two subsamples (results not tabulated; available upon request).

10 In the case of Investments, coefficient b₂ is not statistically significant for municipalities with population between 5,000 to 20,000, and 20,000 to 50,000 inhabitants.

Additional information

Notes on contributors

Sotirios Karatzimas

Sotirios Karatzimas is Assistant Professor of Accounting in the Department of Accounting and Finance at Neapolis University Cyprus. His fields of research include public sector accounting and management accounting. His work has been presented in various international conferences and has been published in reputable journals such as Government Information Quarterly, International Review of Administrative Sciences, Public Money and Management, Journal of Applied Accounting Research, Accounting Education, and other.

Vassilios-Christos Naoum

Vasilios-Christos Naoum is Assistant Professor of Financial Accounting at the Department of Maritime Studies of the University of Piraeus. His main academic interest focuses on asymmetric cost behavior, earnings management and organization capital. His work has been published at academic journals such as Management Accounting Research, European Accounting Review, International Journal of Finance and Economics, Journal of Applied Accounting Research, Journal of Managerial and Financial Accounting, Journal of Intellectual Capital.

Isabel Narbón-Perpiñá

Isabel Narbón-Perpiñá is a postdoctoral researcher of the Department of Business at Universitat Autònoma de Barcelona. Her main fields of specialization are public economics, in general, and the analysis of local government performance, in particular. She has published in specialized journals such as Cities, Local Government Studies, International Transactions in Operational Research or SERIEs.